Opinion: Trump should thank Europe for propping up the U.S. stock market

The president isn’t getting anything done, but it doesn’t matter because the ECB is boosting liquidity

Reuters

The stock market is being driven by ample liquidity, and that is masking President Trump’s failures.

By

ThomasH. Kee Jr.

President Trump’s ability to pursue his agenda is in doubt more than ever.

Some people might say they saw the chaos and conflicts coming, but does the stock market care?

Without rehashing occurrences from the past week and the subsequent backlash, my focus here is on market perception and liquidity influences. What is the market going to do now that the President’s Strategic and Policy Forum, whose members included BlackRock CEO Laurence Fink and Blackstone CEO Stephen Schwarzman, has been disbanded?

The printing press is on in Europe, and that affects the U.S. stock market.

Innately, we want to know if this is going to hurt Trump’s ability to pursue his pro-business objectives, because we think it makes a difference. The most important of these is tax reform, something that has not yet been directly addressed. The failure to fix health care has been frustrating, and hopes linger that tax reform would be more amicable, but the upheaval in Washington after the past week puts even that into doubt.

These questions are coming at a time when the S&P 500
SPX, +0.64%
is at 24 times earnings. Historically, the S&P 500 has traded with a price-to-earnings multiple of about 14.5, so this is an expensive market. However, the stock market has never been this expensive outside of recessions, so this can be described another way. This is the most expensive non-recessionary market in U.S. history.

Certainly, part of the rationale for this can be attributed to the hopes of tax reform and a pro-business agenda by the president, but there’s more. The stock market is liquidity-driven, and that is much more important. In fact, ample liquidity could easily mute the market’s reaction to this issue.

Although the Federal Reserve’s policy board is tightening monetary policy by both raising interest rates and reducing its balance sheet, which removes liquidity from the financial system, the European Central Bank is doing the opposite. Across the pond, they are still printing about $60 billion a month, and there’s no immediate end in sight.

After the ECB started targeting equity prices more directly, which happened coincidentally at almost the same time as the Brexit surprise, asset prices began to increase aggressively. So far, they have not stopped, so there is ample liquidity and it is coming like clockwork. Every month more money is coming into the global financial system and a large chunk of that is finding its way directly into the stock market. The relationship is visible when looking at the market’s action since the ECB began buying corporate debt in the open market.

This brings to light something that very well may be more important. Even if President Trump fails to pursue his objective and even if tax reform fails like health care did, the printing press in Europe will still be providing continuous liquidity. At least, there’s no immediate language from the ECB suggesting otherwise.

Therefore, the situation facing investors is not only one in which political uncertainties exist but one in which ample liquidity exists at the same time. The liquidity is fabricated, it is not real demand, yet it is so consistent that it acts as a support mechanism for the stock market even in the face of these political issues. This will not always be true, and in an environment where this did not exist, the political problems would be a bigger issue for the stock market, but it does exist. The printing press is on in Europe and that does affect the U.S. stock market. In fact, it matters more.

Investors certainly don’t like the political issues, but money talks, even when it comes from a printing press. When that changes, the multiple on this market is likely to fall back and the stock market very well could experience a crash, but that day is not today.

At Stock Traders Daily, we are watching closely, because the ECB has already started to taper and the International Monetary Fund has already suggested that stimulative measures do not produce real economic growth, so this consistent capital infusion is likely to come to an end soon. We are already taking internal steps to defend against that, and those also happen to be adequate steps to defend against political uncertainties should those make a more material difference.

We suggest investors do the same, but it is not because of political uncertainties. Liquidity matters more than that, and soon liquidity from the ECB will dry up. We will not be surprised when that happens.

Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily. Kee managed the fourth-best-performing strategy in the world in 2016, according to HedgeCo.

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